The current weakness in natural gas prices and the commodity’s de-linking from crude oil is due to more than just a cool summer, according to a New York, NY-based independent research firm.
For one, overall gas supply is stabilizing, with increased liquefied natural gas (LNG) imports (averaging 1.3 Bcf/d so far this year versus 0.6 Bcf/d in 2001-2002), stabilized Canadian gas imports (10.5 Bcf/d this past February, consistent with 2001 imports of about 10-11 Bcf/d), and higher reported nuclear generation output, said Foresight Research Solutions LLC in its “Energy Insights” report. “In addition, the natural gas rig count remains at historic highs and leading indicators, including last week’s offshore Gulf of Mexico lease sale, remain robust.”
Second, there is continued demand destruction, the research firm noted. “With no substantive available data on short-term fuel switching, permanent plant closings or plans to manufacture/process overseas, we can only point out that [the Energy Information Administration] data show that through April 2004, industrial demand was 21 Bcf/d versus 20.7 Bcf/d for the full year 2002, despite robust 2003 economic growth,” it said.
“Yes, natural gas is cheaper than oil at the moment, but will that really change Dow Chemical’s long-term plan to move natural gas processing operations overseas?”
Lastly, Foresight Research cited slowing economic growth. “With industrial gas demand barely above 2002 levels so far this year, we now face the prospect of slowing economic growth. Having forecast a mid-year slowdown in economic growth since January, Foresight’s economist Dr. Frank Shostak remains pessimistic about prospects for a renewed economic recovery before early 2005,” it noted.
“Understand, our argument is not that the [gas] market isn’t tight. Our argument is that the market is adjusting. It has found a new supply/demand equilibrium for the moment, and investors should at least entertain the possibility of lower natural gas commodity prices around a new, even if temporary, supply/demand equilibrium. If $5.50 per Mcf is the new $1.60 (at which gas traded during many of the gas ‘bubble’ years), then $3.75 could be the new $1 (approximate floor price during the ‘bubble’ years).”
In short, “we believe there is greater downside natural gas commodity price risk…than most investors dream possible,” said Foresight Research. “Investors should thus remain aware of the possibility of $4-$5 per Mcf natural gas pricing this fall.”
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